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Central banks and the question of independence

After several decades in which the independence of central banks was seen as essential to economic stability, the notion is being questioned again. So are central banks free spirits? And do they truly need to be?

The Latin quote "quis custodiet ipsos custodes?" is worth revisiting in the interesting times in which we live. It roughly translates as "who will guard the guardians?” — a worthy avenue of inquiry when it comes to the increasingly thorny subject of central bank independence.

To many, the idea that a central bank must be independent of political interference will sound self-evident. Yet the 300-plus year history of central banking shows us that the concept has rarely enjoyed spells of unbroken consensus and that there is much fluctuation in thought on the subject.

On one level, it seems obvious that politicians seeking short-term electoral gain should not have too much access to the levers which control a country's longer-term monetary policy. Yet central bankers often make mistakes, and when they do, they can easily be painted as unelected technocrats with too much power, rather than expert custodians.

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Turkey's central bank paralyzed as inflation soars

Turkey's central bank paralyzed as inflation soars

So does a central bank really have to be independent of politics to function properly? And if so, how can they be truly independent anyway?

Banking on it

First of all, what exactly is a central bank? Sometimes called a reserve bank, it is an authority that controls a country's currency, money supply and interest rates. It also often works as a regulator or overseer of the country's commercial banking sector.

As long as such authorities have been around, their power and independence from political decision-making has ebbed and flowed with the times. Their status has generally been pegged to the aftermath of economic crises; if they had power before one, they tend to lose it in the aftermath. If they were neutered before the doom, they are often empowered before the dawn.

From the regulation of a stable currency, to the control of inflation and interest rates, to the management of crises, the role of central banks has grown exponentially over the years. However, it took well over 200 years for them to achieve widespread credibility and even after that had happened by the start of the 20th century, they were regularly beset by the slings and arrows of turbulent economics.

From its conception, the ECB was envisaged as independent of political interference

In the 1930s, the US central bank, known as the Federal Reserve, was so fixated on controlling inflation that it had disastrous effects — almost half the country's banks went of business in the space of a few years.

After World War II, various US presidents, from Harry Truman to Richard Nixon, persistently tried to interfere with the Fed's work. Truman was apparently so disgusted by Fed chief William McChesney Martin's refusal to keep interest rates low during his presidential term from 1945-53 that after it had ended, he passed Martin in the street and greeted him with one word: "Traitor."

When the Bretton Woods system of monetary management came to an end in 1971 and international currencies were floated, inflation soared alongside its most dreaded accomplice — high unemployment.

It was from that crisis that central banks derived much of the power and independence they hold today. When the EU's European Central Bank (ECB) was forged as an independent entity in 1990, it was following an established lead set in several countries in the previous years.

Tough like whipped cream

Since the global financial crisis of 2007-2008, which resulted in the Great Recession, the concept of central bank independence has come under renewed scrutiny.

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The world's most powerful central banker

The world's most powerful central banker

A persistent criticism, with roots in the "Black Monday" crisis of 1987, is that in times of trouble, central banks such as the Fed and the ECB have taken their crisis management role to mean bailing out banks and financial sectors rather than ordinary workers and businesses in trouble.

Another criticism, hard to counter, is that for all their expertise which supposedly sets them apart from vote-hungry politicians, central bankers did not predict the crash, just like many previous crises they failed to foresee.

This has all helped to embolden politicians of several shades. From Erdogan's antics in Turkey to Donald Trump's persistent criticism of Fed decisions, it seems there are plenty of people who would happily clip the wings of central bankers.

"Now we have this new trend of criticizing the central banks and putting pressure on central banks," Carsten Brzeski, chief economist of ING Germany, told DW.

"In Europe I think we've had extremely good experiences in showing that central banks do not react to political pressure. Remember what former ECB President Wim Duisenberg once said, that central bankers are like whipped cream — 'the harder you beat them the tougher they get'."

Winds of change

Yet, aside from calls for power to be taken away from central banks, there are also plenty of question marks over just how independent central banks really are.

The Turkish president has been accused of excessive interference with the country's central bank

The heads of central banks are usually appointed by political processes — for example, the European Council picks the ECB head and the US president picks the Fed boss. Because of this, central banks are occasionally criticized for becoming politicized, such as when Transparency International criticized the ECB for veering into "political activity" during the eurozone crisis by being part of the so-called "Troika."

The famed banker of yore Nathan Rothschild reputedly subscribed to the maxim: "give me control of a nation's money and I care not who makes its laws." An insightful mantra or not, it's an illustration of the power potentially at the disposal of central banks or whoever ultimately makes the money decisions.

Given the high stakes involved (see Turkey, for starters), and the long, winding history of central banks being both granted and relieved of mighty powers, it is an idea that may gain further traction in the coming years. The guardians may yet need guardians, after all.

ECB moves to new domicile

A new home for the euro

After a decade of planning and four years of construction, the new ECB building is open for business. The bank has relocated from downtown Frankfurt to the city's East End - a short distance physically, but a long time in the making since its initial planning stages in 1998.

ECB moves to new domicile

Tough design contest

The towering structure already dominates Frankfurt's skyline. The design competition was launched in 2003 and drew 80 renowned architects from home and abroad. Vienna-based architecture firm Coop Himmelb(l)au won the contest, with its building costing an estimated 1.2 billion euros ($1.5 billion).

ECB moves to new domicile

Historic location

The EU's Treaty of Maastricht, signed in 1992, lays out Frankfurt as the ECB's headquarters. In 1998 the central bank moved into the city's Eurotower - an office building, whose rent turned out to be more expensive over time than the bank itself. Officials scrutinized 35 sites and then decided on a disused market hall (pictured) as the location.

ECB moves to new domicile

Integrating the past

The sprawling area was last used in 2004 as a wholesale fruit and vegetable market. With most of the buildings dating back to 1928, preservation rules required the complex to be incorporated into the modern ECB structure. The market's five halls now house an exhibition area and a visitor center, as well as conference rooms and a cafeteria.

ECB moves to new domicile

Rising high

The ECB building's two towers are 185 meters (607 feet) and 165 meters tall, respectively, and are linked by an atrium on the ground floor. With 45 and 43 floors, they provide ample office space.

ECB moves to new domicile

Glass and concrete

The whole structure is flooded with light, and the facades are partly asymmetric. The ECB said the new building should be an open work environment, with bright and flexible rooms. Many offices have moveable walls.

ECB moves to new domicile

Old and new location

The ECB used to rent office space in four Frankfurt buildings - the best known being the Eurotower. The bank had to give up its plan of completely moving out of that building, once the new home was completed. With its new task of supervising Europe's banks, the ECB needed more space than originally planned.

ECB moves to new domicile

The boss moves as well

ECB President Mario Draghi will move just like his coworkers. The downside: In the council's new conference room on the 41st floor, Draghi will be sitting with his back to the windows, thus missing out on the spectacular view of the city.

ECB moves to new domicile

Energy efficient and sustainable

The ECB is keen on saving energy. Rain water is collected on the roof of the market hall to water plants and to flush toilets. The heat generated by the bank's computer center is used to heat offices. In the summer, sunblinds and glare shields prevent the building from warming up.

ECB moves to new domicile

'Mainhattan'

Shiny skyscrapers belonging to banks and insurance companies dominate the Frankfurt am Main city horizon. The new ECB headquarters (foreground) expands the skyline that gave the city its nickname "Mainhattan."